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Frequently Asked Questions

Qualified Plans

  • In order for a business to sponsor a qualified retirement plan, a representative of the sponsor must adopt a written plan document, notify participants, and set up a qualified retirement trust. So what is the plan document?

    The plan document defines the terms of the plan. This includes stating who is eligible to participate, when eligible employees enter the plan, how and when participants earn or accrue benefits, when and how the benefits are payable from the plan and various other factors relating to benefits. This is a legal, binding document. You should have assistance from a professional to draft your plan document.

    Plan documents come in various forms – prototype, volume submitter, and individually designed documents.

    A prototype document has been preapproved by the IRS. It generally consists of two parts – the adoption agreement and the basic plan document. The adoption agreement is generally a “check box” listing that allows the plan sponsor to choose from a limited number of options. The basic plan document contains all of the definitions and rules / limits imposed by applicable laws and regulations. This is the least flexible type of plan document. The number and types of options for plan design are limited. The IRS approval is evidenced by an “Opinion Letter” issued to the company that submitted the language to the IRS for approval. Individual plan sponsors may rely on the Opinion Letter as proof that the plan is qualified. Prototype documents are often provided by mutual fund companies, insurance companies, and third party administrators.

    A volume submitter plan document also has language that has been preapproved by the IRS. This type of document generally reads more like a book. Only the sections of the preapproved language that the plan sponsor elects will appear in the document. The plan sponsor is limited to the options already preapproved; if the document language is changed beyond those options, the plan may fall out of volume submitter status. The IRS approval is evidenced by an “Advisory Letter” issued to the company that submitted the language to the IRS for approval. Generally, individual plan sponsors may rely on the Advisory Letter as proof that the plan is qualified. However, if the preapproved document language is altered, the plan document must be submitted to the IRS for a “Favorable Determination Letter” (see below) to ensure reliance on its qualified status. Volume submitter plan documents are often available from attorneys and third party administrators.

    Individually designed plan documents are generally written by attorneys. They must contain certain definitions, provisions and references to regulations to comply with applicable laws and regulations. However, they also offer the most flexibility in plan design. Because the IRS has not preapproved the language, the individually designed plan document must be submitted to the IRS to demonstrate the plan complies with the law and regulations. This is done by requesting a “Favorable Determination Letter”. There is a filing fee payable to the IRS to request the favorable determination letter, as well as fees for services to prepare the filings and required notices.

    A “Favorable Determination Letter” is a letter issued by the IRS to a plan sponsor indicating that the plan document contains all of the necessary limits and language, and in form, at the time the letter is issued, constitutes a qualified plan. The Favorable Determination Letter does not guarantee that the operation of the plan is approved, just the language of the plan.

    If a plan sponsor wishes to change the terms of the plan, these changes must be adopted in writing as an amendment to the plan. You must also notify participants of any material changes to the plan. Like the plan document, an amendment is also a legal, binding document and you should get assistance from a professional. Certain rules apply to the timing and types of amendments that are permitted to be made to a qualified plan, and the desired amendment may also be restricted depending on the type of document originally selected. For example, an amendment which does not conform to one of the preapproved language options of the original volume submitter document may cause the plan to lose reliance on the Advisory Letter.

    All qualified plan documents must be kept up to date – that is, amended for changes in the law or regulations. Whenever a law or regulation is enacted that affects qualified plans, the plan document may need to be amended to change or add new language. Periodically, the entire plan document must be restated. Currently the IRS requires restatements every 6 years for volume submitters and prototypes. Individually designed plans no longer have a set schedule for restatements.

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  • For a 401(k) plan, a catch-up contribution is a salary deferral that exceeds either a plan or statutory limit, or would otherwise be returned to the participant due to failure of the Average Deferral Percentage (ADP) test. Catch-up contributions are available only to those participants who will be at least age 50 by the end of the year, and are limited by IRC §414(v). For 2017, this limit is $6,000.

    There are several reasons for a salary deferral to be reclassified as a catch-up contribution.

    One statutory limit is the IRC §402(g) limit, which applies to the participant’s maximum permitted salary deferral. For 2017, this limit is the lesser of $18,000 or 100% of compensation.

    The second statutory limit is the IRC §415 annual additions limit. If the total of all employer contributions, forfeitures, and salary deferrals allocated to a participant’s account for a year exceeds the lesser of $54,000 (for 2017) or 100% of compensation, up to $6,000 of salary deferrals which cause the total to be in excess of $54,000 can be reclassified as a catch-up contribution.

    If a participant must have a portion of their salary deferral returned as a correction due to the failure of the ADP test, then up to $6,000 of the salary deferral that would otherwise be returned can be reclassified as catch-up contributions, provided the participant has not already reached the catch-up limit of $6,000.

    In addition to the limits described above, a plan may have a lower deferral limit for all participants, or for a group of participants such as HCEs (Highly Compensated Employees) or owners/shareholders. For example, a plan may place a limit of $5,000 on deferrals for HCEs. Salary deferrals of up to $6,000 in excess of this limit may be reclassified as catch-up contributions for those participants who will be at least age 50 by the end of the calendar year. Special care should be taken when the plan year does not coincide with the calendar year.

    Catch-up contributions from all sources are limited to $6,000 for 2017. Amounts in excess of this limit are excess deferrals, and must be returned to the participant. Catch-up contributions are not included in nondiscrimination testing, such as the ADP test, rate group testing, and the average benefits percentage test.

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  • Generally, a “Required Minimum Distribution” is a taxable distribution from a qualified retirement plan upon attainment of age 70½. This is similar to the requirement that an IRA holder begin taking distributions from the IRA at attainment of age 70½.

    If the participant is eligible to commence his or her monthly retirement benefits from a defined benefit plan, commencing such benefits will generally satisfy the RMD rules, as long as the payment period does not extend beyond the expected lifetime of the participant (or joint lifetimes of the participant and spouse).

    If the participant is a “more than 5% owner”, he is required to begin taking distributions each year from the plan, beginning with the calendar year in which he reaches age 70½ and has accrued a non-forfeitable benefit or account balance. If the participant is not a “more than 5% owner” AND if the plan document allows, he may defer taking his distribution until he actually terminates employment. For this purpose, the definition of “more than 5% owner” is provided in IRC §416, and includes constructive ownership.

    If the participant’s birthday is in the first half of the calendar year, the first distribution must be taken for the year which contains the participant’s 70th birthday. If the participant’s birthday is in the second half of the year, the first distribution must be taken for the year which contains the participant’s 71st birthday. This year for which the first distribution is made is called the “first distribution year”.

    The timing, amount, and form of payment of the RMD will depend on the type of plan (defined contribution or defined benefit).

    RMD from Defined Contribution Plans

    The RMD from a profit sharing, 401(k), money purchase, or target benefit plan are all calculated in the same manner: the “account balance” method. First, the vested account balance as of the end of the prior plan year is calculated. (If the plan year is not a calendar year, additional contributions deposited between the end of the plan year and the end of the calendar year must be added to the account balance.) Using the age on the birthday in the calendar distribution year, the appropriate factor is determined, using the IRS’s Uniform Life Table. (If the participant’s sole beneficiary is a spouse more than 10 years younger than the participant, the IRS’s RMD Joint and Last Survivor Table must be used to determine the factor instead.)

    The RMD is the vested account balance as of the end of the prior year (as adjusted) divided by the appropriate factor.

    For the first distribution year only, the participant can delay receiving the distribution until April 1 of the following year. For every year thereafter, the participant must take the annual distribution by the end of each calendar year.

    RMD from Defined Benefit Plans

    The RMD from defined benefit plans (including cash balance plans) is calculated using the accrued benefit method. If the participant has not commenced taking his or her benefit by the required beginning date, then the participant must commence taking a minimum portion of the benefit. The participant may have three options:

    • The first option is to commence the entire vested benefit, as accrued through the end of the first distribution year, in an annuity form as if the participant has retired. Note: the plan document must allow in-service distributions.
    • The second option is to take a lump sum payment of the entire vested benefit, use the account balance method to calculate the RMD and take this into income, and roll over the remainder into another plan or an IRA. Note: the plan document must allow in-service distributions after attainment of normal retirement age, AND the plan must be sufficiently funded to allow the distribution.
    • The final option is to convert the benefit to a “certain-period only” payment stream over the expected lifetime (using the same IRS tables as for an RMD from a Defined Contribution plan). This option generally allows the smallest annual amount to be taken as an RMD, and also allows the remaining payments to be converted to a lump sum at a later date.

    Participants who are still working may earn additional vested benefits which must be taken as an additional RMD after the benefits are accrued. A new RMD election is required for each year’s additional accrual.


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  • Over the years, Congress has made changes to pension provisions in the Internal Revenue Code to provide fairly equal treatment to corporations and to unincorporated entities. One discrepancy that remains is the inability for sole proprietors to carry over a net loss created because a contribution to a qualified plan exceeds the sole proprietor’s earned income1.

    Earned income is generally the sole proprietor’s net Schedule C income minus ½ of the self‐employment tax. Section 404(a)(8)(C) of the Code provides that contributions to a qualified plan meet the conditions of Code Section 162, and are therefore deductible, “to the extent that such contributions do not exceed the earned income of the individual”.

    If the minimum funding requirement for a sole proprietor’s defined benefit exceeds his earned income for that year, he is in the unfortunate position of either making a non‐deductible contribution to the plan, or not making the full contribution and incurring an excise tax on the funding shortfall. The IRS, in informal guidance, has indicated that “the statute does not appear to accommodate a carryover” to future tax years to alleviate the dilemma. Indeed, Code Section 4972(c)(4) includes a special rule for sole proprietors in just this situation to relieve them from the excise tax on non‐deductible contributions. Alas, the non‐deductible contribution does not create a basis for the proprietor, so ultimately that money will be taxed twice.

    The proprietor can avoid double taxation with careful planning, if the tax return is filed without extension for the year in question. Let’s look at an example where the proprietor has earned income2 of $100,000 for 2016, and the minimum required contribution to his defined benefit plan is $150,000, plus an interest adjustment, depending on the deposit dates of the contribution.

    Step one: By April 15, 2017, deposit no more than $100,000, claim that contribution on the 2016 tax return, and file without extension by April 15, 2017.

    Step two: Between April 16 and September 15, 2017, deposit the remaining required contribution, plus any interest adjustments. This will meet the 2016 minimum funding requirement by the required due date of September 15, 2017. Because the remaining contribution is deposited after “the time prescribed by law for filing the return” (i.e. April 15, 2017), it is deductible in the 2017 tax year rather than the 2016 tax year, even though it is applied to the 2016 plan year.

    Note that just applying for an extension to file the tax return will prevent the proprietor from employing this technique, even if the filing is actually submitted by April 15. The extension changes “the time prescribed by law for filing the return” to October 15, and any contribution for the 2016 plan year made by that date is automatically deemed to have been made on December 31, 20163.


    1This situation can arise for any entity that is taxed as a sole proprietor, such as a single‐member LLC.

    2Earned income as used here is net Schedule C income minus ½ Self‐employment tax.

    3Internal Revenue Code Section 404(a)(6).


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  • Qualified plans must not discriminate in favor of Highly Compensation Employees (HCEs).

    Nondiscrimination testing is done using HCE and non-HCE classifications. This includes testing for minimum coverage and participation, benefit and salary deferral levels, and a collection of plan provisions known as “benefits, rights, and features”. So, who is an HCE?
    An employee is an HCE for a plan year if the employee meets at least one of two tests: 1) the 5% owner test; and 2) the compensation test. [IRC §414(q)(1)]

    An employee is an HCE under the 5% owner test if the employee owns more than 5% of the employer (or a related employer) at any time during the current year (the “determination” year) or the prior year (the “lookback” year). Ownership may be attributed to family members in certain circumstances. [IRC §414(q)(1)(A)]

    An employee is an HCE under the compensation test if the employee’s gross compensation (IRC §415 compensation, including elective deferrals) for the lookback year is more than the HCE compensation level for that year. The HCE compensation level is adjusted periodically. For 2015 to 2017, the level is $120,000. [IRC §414(q)(1)(B)]

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  • In determining who is a Highly Compensated Employee (HCE), the employer may choose to apply the “Top-Paid Group election”. This election limits the number of employees who are treated as satisfying the compensation test to the top-paid 20% of nonexcludable employees. Note that this limitation applies ONLY to the compensation test, and not to the ownership test.

    Under this election, an employee would be considered a Highly Compensated Employee only if 1) the employee is in the top 20% of the nonexcludable employees in the lookback year when ranked by compensation, and 2) the employee’s compensation in the lookback year was in excess of the HCE compensation level for that year.

    The Top-Paid Group election must be stated in the plan document. If amending the plan, the election must be made (or eliminated) prior to the end of the year in which the change is effective. Note: there could be anti-cutback issues if a defined contribution plan does not have a last day provision, and the change results in a lower allocation to a participant than would have been provided under the previous definition.

    The Top-Paid Group election applies for all testing purposes, across all plans of an employer, for each year in which it is effective. If the employer maintains two or more plans with different plan years, the Top-Paid Group election applies to all plan years that begin in the same calendar year. All of an employer’s plan documents must contain the same election.

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Other Post Employment Benefits

  • While the most common OPEB is retiree healthcare coverage, there are many other benefits that may be considered OPEBs, including life insurance, long-term care insurance, disability benefits, and certain sick leave conversion programs.

    OPEBs can be paid in whole or in part by the employer, but could also be completely paid by the retiree. OPEBs do not include pension benefits or compensated absences, which are treated differently under the applicable accounting standards.

    Visit our OPEB page to learn more about Other Post Employment Benefits.

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  • Yes, liabilities arise when continued medical coverage is offered to retirees at the same premium rate as active employees, even if that coverage is on a self-pay basis. Since retirees are generally older than an active population, retirees can be expected to generate higher medical claims, and therefore higher premiums for the active population. When the total premium does not represent the full cost of covering the retirees, the additional cost is called the “implicit rate subsidy.” The various accounting standards that apply to OPEBs all require that the implicit rate subsidy be valued and reflected in the financial statements.

    Virtually all public sector employers have an implicit rate subsidy to value under the applicable GASB Statements due to Oregon Revised Statute (ORS) 243.303. This statute mandates that retirees of Oregon public employers be provided continued access to that employer’s health plan until Medicare-eligibility, and can be charged a rate no higher than the COBRA rate for that coverage.

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  • In most situations, plan sponsors need to report the value of their OPEBs directly on their financial statements.

    Governmental entities sponsoring retirement plans follow the accounting standards of the Governmental Accounting Standards Board (GASB). For OPEB plans, the most recent and applicable GASB Statements are 74 and/or 75.

    Private sector employers sponsoring retirement plans follow the accounting standards of the Financial Accounting Standards Board (FASB). Accounting Standards Codification Topic 715 governs the accounting for OPEB plans.

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  • In 2012, GASB released Statements 67 and 68 (and later, Statement 73), which revised the existing financial reporting standards in Statements 25, 27 and 50 for pension plans. In 2015, GASB released Statements 74 and 75 for OPEB plans, which will replace statements 43 and 45, and result in a fundamental change to the existing financial reporting standards for state and local governments providing post employment benefits other than pensions.

    GASB 74 applies to OPEB plans with irrevocable prefunded assets. GASB 75 applies to employers sponsoring OPEB plans. In the year of implementation, employers are required to recognize an obligation equal to the Net OPEB Liability (NOL), which is essentially the excess of the present value of accrued benefits over the market value of assets. (Under previous accounting standards, this amount was called the Unfunded Actuarial Accrued Liability, and was a footnote disclosure item). In subsequent years, changes in the NOL must be recognized as OPEB expense, or be reported as deferred inflows/outflows of resources.

    The statements also include more extensive note disclosures. Specific changes in the requirements include:

    1. Liabilities must be discounted using a rate reflecting a 20-year tax exempt general obligation municipal bond.
    2. Actuarial present value must be attributed using the Entry Age Normal cost method.
    3. Deferred components of OPEB expense will be recognized over defined, closed periods.
    4. Information related to the assumptions used to determine the liability should be disclosed, including the impact of a +/- 1% change in discount rate or healthcare trend rates.
    5. Required Supplemental Information will now include a 10-year schedule of information relating to the NOL, changes to the liability, and information related to contributions to the plan.

    Statement 74 is first effective for fiscal years beginning June 15, 2016, and Statement 75 is first effective for fiscal years beginning June 15, 2017. Visit our page to read more about the release of GASB Statements 74 and 75.

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  • In the past, relatively small employers participating in a large, pooled health plan were sometimes exempt from having to account for an implicit rate subsidy, due to a “community-rating” exception. In general, this exception applied when the claims experience of an individual employer would have virtually no impact on the premium being charged to that employer.

    The accounting standards that apply to OPEBs refer to the Actuarial Standards of Practice (ASOPs) in determining whether a community-rated situation applies. However, the revised ASOP 6 essentially eliminated the concept of the community-rating exception. As a result, agencies participating in community-rated plans that have previously been exempt from reporting liabilities due to an implicit rate subsidy may now be required to do so.

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  • GASB Statement 45 required OPEB valuations every two years with one exception. Agencies with less than 200 employees that have not experienced a significant change in their benefit structure over the period of time can use their valuation for up to three years. With the release of GASB Statements 74 and 75, OPEB valuations are required to be performed every two years, but the board encourages annual valuations. Triennial valuations will no longer be available under the new GASB standard. Visit our page to read more about the release of GASB Statements 74 and 75.

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  • OPEBs are considered pre-funded when the employer makes annual contributions to an irrevocable trust account (funds can only be used for retiree benefits). The account balance of the trust offsets the actuarial accrued liability, reducing the agency’s unfunded liability.

    When an agency pre-funds its OPEB liabilities, the actuary may generally use a higher discount rate to value the liabilities of the plan, reflecting the higher expected earnings of the OPEB trust.

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  • The first step to beginning the process of having an OPEB valuation completed is to have a conversation with one of our consultants so that we can understand the benefit structure, demographics, and other aspects of the benefits to be valued. From that point, we request necessary employee data and any other information needed to do the valuation. Typically from beginning to end, our process is completed within 3 months. However, we work with each individual client to meet your needs. Contact a consultant today to see if your OPEB needs to be valued, or to get a free quote on Independent Actuaries, Inc.’s valuation and reporting services.


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Cash Balance Plans

  • A retirement plan that looks like a 401(k)/Profit Sharing Plan, but has significantly higher deductible contribution limits. Because they combine characteristics of different kinds of plans, Cash Balance Plans are sometimes referred to as Hybrid Plans.

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  • Each participant has a “hypothetical” account balance that grows each year with employer contributions (called pay or principal credits) and interest credits. Account balances are hypothetical because there is really just one pooled account for all plan participants, but from the participant’s standpoint, there’s nothing hypothetical about it; the balance represents the benefit to which they are entitled.

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  • A cash balance plan looks and feels like a 401(k) Plan from the participant’s standpoint.  An account grows each year with employer contributions and interest.  However, the plan assets are pooled and the employer directs how the money is invested.  Interest is guaranteed on participants’ accounts and may not necessarily follow the plan’s actual investment return on assets.

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  • Interest credits are chosen by the plan sponsor, are specified in the plan document, and can be either a flat amount or tied to an index (e.g. – 30-year Treasury rates). Click here for a more in-depth analysis of the interest crediting options. Again, this is a key difference between Cash Balance Plans and 401(k)/Profit Sharing Plans. No matter what the pooled assets do, account balances grow at the specified interest credit rate.

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  • Because plan assets are pooled but account balances earn “guaranteed” interest credits, it is usually desirable for actual returns to match the interest crediting rate as closely as possible each year. Because of this, plan assets are typically professionally managed to ensure that the plan provides dependable, predictable levels of deductible contributions.

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  • Yes, like any qualified retirement plan, assets are protected from corporate creditors.

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  • A participant can choose to roll over or take a cash distribution of their vested hypothetical account balance.  Since the benefits are from a defined benefit plan, they also follow defined benefit rules. If the account balance is over a certain threshold, the participant must also be given a choice of an annuity form of payment.

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  • A Cash Balance Plan, especially when added on top of an existing 401(k)/Profit Sharing Plan, is a solution that allows the business owner(s) to increase pre-tax savings enough to achieve a comfortable standard of living in retirement.  Small business owners who have dependable high levels of income, who may already have a 401(k)/Profit Sharing Plan, and who would like to save more than $59,000 per year on a tax-deferred basis are likely to benefit from a Cash Balance Plan.

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  • Unlike 401(k)/Profit Sharing Plans, in which deductible contribution limits are generally uniform for everyone, the maximum deductible amounts in a Cash Balance Plan vary considerably by age, with much larger contributions possible for older individuals.

    Examples of Maximum Annual Contributions to

    401(k), Profit Sharing & Cash Balance Plans

    Age 401(k) Only 401(k) w/ Profit Sharing Cash Balance Total Maximum
    60-65 $24,000 $59,000 $247,000 $306,000
    55-59 $24,000 $59,000 $189,000 $248,000
    50-54 $24,000 $59,000 $145,000 $204,000
    45-49 $18,000 $53,000 $111,000 $164,000
    40-44 $18,000 $53,000 $85,000 $138,000
    35-39 $18,000 $53,000 $65,000 $118,000

    (Contribution levels based on 2016 limits. Actual contribution amounts may depend on IRS compliance testing results)

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  • Yes. A Cash Balance Plan can be designed with varying benefit levels, or “tiers”, for individual partners. For example, one benefit level could be $150,000 per year, another $100,000 per year, and another $0. Further, employees will usually participate at a much lower level than the business owners (8% to 10% of pay is typical).

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  • Yes. Although benefit levels should not be changed on a regular basis, a Cash Balance Plan can generally be amended to increase, decrease or even eliminate benefit levels for any or all participants.  Note though that there are certain restrictions on lowering the interest crediting rate.

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  • Contact Independent Actuaries, Inc. at 503.520.0848, and a consultant will request basic information about your business. We will then produce a customized illustration that will demonstrate the contribution levels that can be obtained. From there, we can work with you and your advisors to refine the illustration to best meet your objectives. Should you decide to proceed, we will draft the required plan documentation to create the plan, and you can start making deductible contributions.

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